The amazing rise of the stock market since the Coronavirus crash does not represent old fashioned market reality. I won’t say it doesn’t reflect reality because it does. The reality is the Federal Reserve and the US government has pumped so much money into the economy that it is kicking like a pair of severed frogs-legs in a biology experiment. While the jolts of currents are injected into the dead flesh it appears to the watchers that the organism is alive, which it is to a very limited extent, but we all know that the whole creature itself is dead. The moment the current goes off the lifelike behaviour ends.
The Fed pumps liquidity and up goes the stock market. Now the Federal Reserve says it is not looking at the stock market and by implication it is pumping to keep the credit market alive and if the stock market goes up then so be it. Clearly that can’t be totally accurate because if the stock market bubbles (it is) too much then that itself will produce a significant threat to the system.
If you look at the credit crunch of 2007 onwards, the destruction came from the credit markets. The bond markets are the senior markets, equities are junior so if the stock market crashes that is very bad and needs to be watched out for, but it the credit market die then its all over, period. As such pumping to keep the credit markets open and leaving equities to look after themselves makes sense, but nonetheless the outcome is to make the stock market no longer a free efficient market and instead create a real bubble in valuations.
The stock markets levitation from its crash is absolutely correlated with the Federal Reserve pumping money into the system.
… and now its stopped.
In the week to 15th June the Fed pulled money out of the market.
This begs the question of why?
Does the economy no longer need stimulus… has it had too much?
Clearly it is the latter and why has it been over stimulated? What is the indicator for that?
It’s the stock markets overperformance. The Fed has pulled money out to stop the stock market going vertical into a bubble doomed to crash.
This is what I predicted in April 14th.
So Im going to amend this to:
I thought I’d have to modify this map more but I haven’t had too, the comfort zone still looks like a good range to me. Now we have a top in place.
It seems clear to me that the Federal Reserve has pulled out money from the markets to check the runaway rise of the market now powered by FOMO. The Crypto crowd raised on wild Bitcoin swings have turned up at the stock market and are doing their FOMO to the moon thing with stocks. This is great but we all understand the danger of a stock market going vertically up without their having to be the biggest recession since the birth of the industrial revolution in progress.
So what now?
1) The markets are no longer free. They are highly moderated and filled with inefficiencies which should be a license to make money for the smart. Politics is in charge.
2) The markets will not be allowed to meltdown. Where that meltdown red line is on the chart is a guess but the above chart is probably roughly in line with the bottom range.
3) The government and its agencies will nurse the markets along for the years necessary to get back to an equilibrium of calm. We’ve had that since 2008, expect more of that kind of ‘curation’ untill and only until a happy outcome or a colossal breach.
4) To keep things going the ‘powers that be’ will pump when the market goes low and pull liquidity when it overheats. This will produce big swings.
What to do?
Buy the big dips and sell the rallies.
This is a pure trading market defined by the liquidity injections of the Fed and government stiimulus. In the coming period we can guess that if the Fed is pulling money from the market then its because the stock market is too high and it will take a fair significant drop to make them comfortable about levels. Action in the credit market will be all important so if the credit market seizes, then they will flood markets with new cash to reopened them, if necessary to avoid a defining market malfunction they will rebase the value of money to get to a position where support is impossible or unnecessary. This is going to take a long time of crazy markets.
As such the only way to go is to stalk the Federal Reserves policies and hope you call them right.
For now it seems time to think about the high probability of a correction. The market is way too high and without new money it will fall back. Right now with the world in various states of economic lockdown things are only going to deteriorate further so unless there is a miracle or governments choose to go full ‘Zimbabwe’ there has to be a pullback.
…. But going full ‘Zimbabwe’ is an option so the real situation is anyway you turn it is incredibly stormy seas ahead.